What are Payroll Taxes and How do they work?
Introduction If you’ve ever looked closely at your paycheck, you’ve probably noticed several types of taxes being withheld—like Social Security, Medicare, and federal income tax. But what exactly are these taxes, and where does that money go? In this post, we’ll break down the key types of payroll taxes, what they fund, and why they matter. 1. What are Payroll Taxes? Payroll taxes are taxes employers withhold from employees’ wages and are used to fund specific federal programs. These include: Social Security Tax Helps provide income to: Retired workers Disabled individuals Survivors and dependents of deceased workers The current rate (as of 2025) is 6.2% from the employee, and 6.2% from the employer, up to the annual wage limit . Medicare Tax Helps fund medical benefits for: P eople aged 65 and older Certain younger individuals with disabilities The standard rate is 1.45% from both the employee and employer. Employees earning above a threshold (e.g., $200,000 for ...